Shedding tears – The Myth of the three-tier system

The Granholm and Costco case began in a new era for wineries. Vintners national rejoiced when this ruling seems to break the walls of the three-tier work and exactly the advent of free trade in wine. But when the dust settles, the results were just the opposite in many states.

These two court decisions state needs to review all discriminatory aspects of their wine distribution system, in order to level the playing field between in-state and out-of-state suppliers. Wineries in California and Washington were strong enough to cash in on the promise of free trade, by getting their legislatures to pass laws that granted the rights enjoyed by domestic wineries to out-of-state suppliers as well. However Vintners in Virginia, Indiana, Illinois, Pennsylvania, Oklahoma, Delaware, Kentucky, and Louisiana were not so lucky. In the States, a precious privilege of self-distribution and direct-to-consumer sales were attacked by a strong wholesale lobby and in some cases, wineries actually lost their privilege.

In various battles come across the nation, weekend three-tier system stands out as one of the main reasons for reducing the marketing options of small wineries. But behind the scenes, the controversy is really being driven by the interaction of various factors that are rarely openly acknowledged in the halls of the legislature

entrenched economic interests of the wholesale tier

An antiquated rules designed to solve problems long gone, and

decline in market access for small producers for the group.

It’s time to pull back the curtain and separate myth from reality. There is no doubt that the three-tier system is practical and economic realities, but it is disingenuous wholesalers to act as if the three-tier system was tied to the stone tablets handed down from heaven. While naive wine industry members watch, make sure wholesalers regulators keep singing favorite mantra of “we are three-tier state,” without any of them to see whether the law on state supports their position.

The goal of this article is to help Vintners on the frontlines protecting precious marketing privilege of exposing some of the myths surrounding the three-tier system. Wholesale tier is getting away with highway robbery when they show a three-tier system inviolate principle that selling wine will be offered.

Indeed, it is surprising abundance of evidence against this largely unquestioned controversy. Not only do state laws do not support propaganda wholesalers’, but a closer look at the article states that the wholesalers themselves are blurring the lines between tiers. However, one thing should not be able to change the balance of power, intuitive in this article will help you to see through smoke and mirrors.

What is a three-tier system anyway?

At the end of prohibition, reformers across the country both decided that the best way to prevent manufacturers from retailers control was to establish a mandatory separation between the two levels of the industry. Part of the motivation for this extreme measure was the desire to protect retailers from the criminal element who had taken over the alcoholic beverage supply chain of the ban. It was also believed that economic power producers had applied across the retail, evidenced by the abuse of pre-ban “tied houses saloons” had led to intemperance. Thus, the three-tier system of thought.

Three-tier system prohibits manufacturers have a financial interest in the retailer, and created a Middle Tier independent distributors. So the first tier of suppliers, wineries, breweries, distillers and importers. The second tier is a wholesaler; third tier is retail. The first and second tiers (suppliers and wholesalers) are often referred to collectively, the “upper tiers.”

Under this system, manufacturers sell only to distributors, and distributors sell only to retailers, who then sell to consumers. We Repeal most states adopted some parts of the system, and both the reality and the myth of the three-tier system were born.

economic and practical reality

Three-tier system is an economic fact of distribution of alcohol almost every drop of beer, wine and spirits sold in the United States goes through all three tiers . While wineries have the most potential to make sales outside the three-tier system, over 90% of the wine sold in the United States still goes through all three tiers.

Even Costco, have won the right to buy directly from out-of-state wineries and breweries, you will find that most manufacturers still want to use their distributors. Distributors can and provide a valuable service and they will continue to deal with the vast majority of wine distribution in the future.

existing distribution channels for wine is similar to the distribution channel for other products such as soft drinks and other beverages. But what is different in the beverage alcohol supply chain is the role of distributors is not dependent on the utility value, but on the set of legal mandates that have been enshrined in the simple phrase “three-tier system.” The phrase is often used in place of common sense and legal research as a stand alone magical incantation the issues or objections. Regulators routinely preface their statements with, “You know, we are a three-tier state,” as if that justifies or explains everything. But the truth is, the only way to be sure how strictly separate tiers are in any state is to determine her songs tell really.

What are the legal mandate for the three-tier system?

wholesalers not admit it, but even they can not deny that there is no national mandate for three separate tiers. 21. Amendment to the Constitution says nothing about the three-tier system. That left it up to states to organize some kind of equal distribution. Likewise, the Federal Alcohol Administration Act (FAA Act) does not mandate three independent and separate tiers. In fact, it prohibits only some interests in retail with top tier members, but allows suppliers and wholesalers to own stores direct. Further, FAA law has no restrictions on cross-ownership between suppliers and wholesalers. Although the FAA law imposes significant restrictions business practice in trade between members of different tiers in the industry, it does not prohibit the winery from becoming a retailer or a wholesaler, or a wholesaler price of the winery or retailer.

A few years ago one winery customers in Eastern State would become an importer and wholesaler of French wine. When we discussed his plan with the state regulators, we were told that he was qualified for further license he would need, as there was a “three-tier state.” It was true that government regulations ruled he is interested in both the supplier and wholesale tier. However, the regulations state showed they were based on “federal law.” (You can see what is wrong with that position? If not, go back and read the previous paragraph!) When we pointed out that federal law does not prohibit our customers from operations in both the upper tiers, the state willingly gave, and give him a wholesaler license. Reality prevailed over myth.

However, several states passed laws specifically require strict division between tiers, many not. Nearly all states have laws that require separation between retail and upper tiers; almost all states prohibit a supplier or wholesaler of wanting retail license. Winery tasting rooms and restaurants owned wineries are common exceptions are brewpubs. But in many states is no prohibition barring the upper tier integration. Several states allow in-state producers to sell directly to retailers or allow the manufacturer to keep the wholesale license for the same purpose.

In the past, states often allowed in-state licensees to bridge the truth is, these countries have only two-tier system for in-state producers, since no law mandates the separation of the upper-tier interest. two upper tiers, but did not give out-of-state producers the same privilege. Today, the Granholm decision, such discriminatory treatment of out-of-state suppliers could be a challenge. Fear of this possibility galvanized wholesalers in Virginia and Louisiana to successfully tread legislation depriving the state-of wineries that are self-distribution.

But surprisingly, several states have traditionally allowed out-of-state wineries and brewers to keep the wholesale and self-distribute their own product in the state. Other laws require wholesalers to have a minimum amount of warehouse space, investment and inventories may make the exercise of rights impractical in certain cases, but the fact is that the three-tier system is not mandatory in those countries.

So we see that the three-tier system is not delegated by the Constitution or federal law, but only by state laws in some states. Regardless of the aura around a three-tier system, it may not be necessary to maintain moderation, orderly market or collection of taxes. Make California and Washington have any less regulated markets where they are allowed into and out of state wineries to become wholesalers or sell directly to retailers? Do they have problems with intemperance or collection of taxes? Most agree that the answer is “no” on both accounts.

Not surprisingly, California Beer and Beverage Distributors Association argued that California has a problem and proposed legislation to add new “intent language” ABC code of California. Although California law recognizes all three tiers of distribution, it is not labeled a “three-tier system.” In a bold move to protect the shrinking turf, distributors Association wanted to add language to the law stated the “three-tier system,” and that such a system was “essential for moderation, regulated markets and the collection of taxes.” Officially, the Association claimed the preconditions for the improvement was to avoid linking higher excise moderation and to update songs for technological change. The bill never advanced from the committee and left most wondering what distributors had been smoking. In their zeal to get the “myth of the three-tier system” enshrined in law, distributors completely ignored reality: California law allows freely upper tier integration

The unholy double standard

Undoubtedly distributor lobby in Virginia and Louisiana applied Grail protect the three-tier system when it failed to remove the rights in-state wineries to self-distribute. But ironically, the importer-wholesaler from one of those countries wanted to buy a winery in another state. After being initially told that her plan would break the three-tier system of the home state of his, her lawyer proved that the law does not make it illegal for importer-wholesaler to go with a supplier in another country. So while wineries have been made to suffer in order to preserve the myth that the three-tier system must be maintained at all costs, this middle tier member had no compunction about transcending system to become a supplier.

Ironically, although wholesalers passionate Crusade for three separate tiers are relatively few wholesalers prevented from being or acting as suppliers. For foreign products, wholesalers regularly act as importer-of-record-a mix of first and second tier. In most states the authorized importers and wholesalers, we have integrated the upper tier for almost all imported brands. Wholesalers also respond suppliers by becoming the brand owners. While the actual production is contracted out, wholesaler-brand owner makes all major decisions about the brand. Many major wholesalers already interested in the brand, such as ownership of Young the market of Vodka brand Seagram, or Southern Wine & Spirits “ownership Shaw Ross and many imported brands.

Clearly, if wholesalers are working as suppliers, they are showing that there is no tied houses evil in the upper tier of the merger. If the wholesalers can be suppliers, why can not wineries be wholesalers or sell directly to retailers? To complete this illogical double standard should wholesalers forbidden interest to the supplier, including being imported or own brands? Such a proposal would be strongly opposed by them, we are sure. Actually follow strict three-tier system would cramp the style!

Let get real

They never admit it, but their behavior wholesalers’ makes it clear that the myth of the three-tier system has been specious, hypocritical arguments that second tier protects the economic interests at the expense of wineries. If wineries hope to overcome this large, well-organized opponent, we’d better start educating ourselves and our regulators in the difference between myth and reality.